Euler scheme and tempered distributions
Given a smooth -valued diffusion starting at point x, we study how fast the Euler scheme with time step 1/n converges in law to the random variable . To be precise, we look for the class of test functions f for which the approximate expectation converges with speed 1/n to . When f is smooth with polynomially growing derivatives or, under a uniform hypoellipticity condition for X, when f is only measurable and bounded, it is known that there exists a constant C1f(x) such that If X is uniformly elliptic, we expand this result to the case when f is a tempered distribution. In such a case, (resp. ) has to be understood as (resp.Â ) where p(t,x,[dot operator]) (resp. pn(t,x,[dot operator])) is the density of (resp. ). In particular, (1) is valid when f is a measurable function with polynomial growth, a Dirac mass or any derivative of a Dirac mass. We even show that (1) remains valid when f is a measurable function with exponential growth. Actually our results are symmetric in the two space variables x and y of the transition density and we prove that for a function and an O(1/n2) remainder rn which are shown to have gaussian tails and whose dependence on t is made precise. We give applications to option pricing and hedging, proving numerical convergence rates for prices, deltas and gammas.
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Volume (Year): 116 (2006)
Issue (Month): 6 (June)
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References listed on IDEAS
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- Arturo Kohatsu & Roger Pettersson, 2002. "Variance reduction methods for simulation of densities on Wiener space," Economics Working Papers 597, Department of Economics and Business, Universitat Pompeu Fabra.
- Konakov Valentin & Mammen Enno, 2002. "Edgeworth type expansions for Euler schemes for stochastic differential equations," Monte Carlo Methods and Applications, De Gruyter, vol. 8(3), pages 271-286, December.
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